From New York to Nkandla, shale gas is indeed a game-changer

JONATHAN DEAL

15 JUL 2014 01:19 (SOUTH AFRICA)

Shale gas has been hailed as a game changer worldwide, but many of the numbers being crunched are outdated – and the reality is a little more sobering. It’s worth picking up on US shale gas hype and bringing it down to earth in the Karoo.

Since 2011, there have been some incredible statements from oil and gas executives, but the uncontested winner must come from Chris Faulkner: “There is enough oil and gas underground (in America) to supply America for an almost endless amount of time.”

Shale gas has been hailed as a game changer worldwide, but many of the numbers being crunched are outdated – and the reality is a little more sobering. It’s worth picking up on US shale gas hype and bringing it down to earth in the Karoo.

Since 2011, there have been some incredible statements from oil and gas executives, but the uncontested winner must come from Chris Faulkner: “There is enough oil and gas underground (in America) to supply America for an almost endless amount of time.”

I met Faulkner, the soft-spoken CEO of Breitling Energy, when he presented on shale gas at a conference in Johannesburg. He was smartly dressed, self-assured and articulate. What I read in his interview with RIGZONE caused my jaw to drop open. RIGZONE’S Gene Lockard quizzed Faulkner on the recent decision by the New York Court of Appeals, in which the Court upheld lower court rulings, which allow municipalities to apply zoning ordinances to ban the practice of fracking within their borders.

Faulkner’s clanger, though, is nothing to do with the court decision but rather a statement that appeared later in the text. Responding to a question about how the ruling will affect drilling activity in New York State, Faulkner guesses that ‘drillers will go where the oil and gas is,” and elaborates: “As we’ve all seen, there’s enough oil and gas underground to supply America for an almost endless amount of time…”

Let’s rewind that. “Enough oil and gas underground to supply America for an almost endless amount of time.”

Consider President Obama on 25 Jan 2012: “We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy.” President Obama has no doubt been misinformed by:

Aubrey McClendon, ex CEO of Chesapeake Energy, on CBS News’ 60 Minutes November 14 2010: “In the last few years we have discovered the equivalent of two Saudi Arabias of oil in the form of natural gas in the United States. Not one, but two.” Asked by talk show host Stahl: “We have twice as much natural gas in this country, is that what you are saying, than they have oil in Saudi Arabia?” McClendon responded, “I am trying very clearly to say exactly that.” To place McClendon’s Saudi Arabia claim in perspective, in 2011, the annual BP Statistical review of Saudi Arabia was 264.5 billion barrels of proven oil reserves as at the end of 2010 – when McClendon made his claim. This is the equivalent of 1587 tcf. of natural gas multiplied by two (as in two Saudi Arabias) and thus equals 3,174 tcf or enough to power the US at its current rate of consumption for approximately 125 years.

Also weighing in is the US Energy Information Administration (EIA). This body, largely responsible to US Congress for Energy forecasts, reduced Marcellus shale figures in Pennsylvania, in August 2011 from 410tcf to 84tcf after estimating reserves at 2tcf in 2002. During this time Professors Timothy Considine and Robert Watson of Penn State University, in what became known as the Penn State Report 2009 stated that “While reserve estimates… are somewhat uncertain at this early stage, estimates of recoverable reserves of at least 489 trillion cubic feet seem increasingly reasonable”.

The same report also predicted $35 billion in added value and almost 175,000 jobs in 2020. And well-known oil and gas advocate Daniel Yergin – Cambridge Energy Research Associates – predicted that world oil and natural gas liquids capacity could increase by as much as 25% by 2015, with Robert W Esser, director of CERA, asserting: “Peak Oil theory is garbage as far as we’re concerned.” Yergin in 2011 wrote in an article published by the Wall Street Journal that there is more than a 100-year supply of natural gas. It was also reported February 2014 by Moneynews that Yergin claims: “The emergence of shale gas and tight oil in the US demonstrates… how innovation can change the balance of global economic and political power.”

Reviewing the Zuma administration’s Shell-fed shale gas hype, I have to agree. Academic support for the shale gas boom was not far behind, although with a 50% caution, in the words of Professor Terry Engelder (Penn State University) who reported in the Fort Worth Basin Oil and Gas Journal (August 2009), that based on his own calculation, [there was]a 50% probability that the Marcellus would ultimately yield 489tcf.

The real numbers, especially through 2011-2013, reflect a markedly different trend. Between 2006 and 2011, Chesapeake sold whole or partial shale play interests for $17.9 billion, with the bulk of the sales being made to foreign buyers: Total, BP, Statoil and BHP Billiton. As reported later in this document, on those purchases BHP took a $2.84 billion write down, BP took a $2.1 billion write down, and in October 2013 Shell announced that they were selling up in Colorado and Texas, with outgoing Shell CEO Peter Voser telling Financial Times he regretted Shell’s huge bet on US Shale. And as a further example of industry exaggeration, shortly before selling Fayettville shale assets to BHP Billiton in Feb 2011 for $4.5 billion, Chesapeake claimed that EUR (estimated ultimate recovery per well) for Fayettville was up to 2.6bcf from 2.4 Bcf. But this claim is belied by an analysis of 4,258 wells in the Fayettville shale from January 2005 to July 2012 showing that only 1,116 (26%) have produced greater than one Bcf and only 86 wells (2%) have produced greater than two Bcf. This puts average cumulative production per well over 887 wells for Chesapeake/BHP in Fayettville at 719 MMcf – that’s 72.35% in the wrong direction. It’s little wonder that less than 18 months after acquiring Chesapeake’s Fayettville assets, BHP wrote off $2.84 billion – more than a 50% reduction from the purchase price. Is this what South Africa’s Public Investment Corporation (PIC’s) Dan Matlila is so keen to invest state pensions in? Matlila told Reuters in February 2014 that “[s]hale gas will be a game changer here and we will be the biggest investor.”

And in 2011, Cape Town, South Africa, the US hype was embraced by Professor Brian Kantor, at the time the chief economist and strategist for Investec Bank SA.Kantor, working on figures for South Africa of 485tcf (just in the Karoo basin), said: “Were this potential output of natural gas estimated as recoverable by the US EIA, to be captured from the Karoo shale, it would be very large potatoes indeed. It would be the equivalent to about 402 years of SA consumption of oil at current rates: 365*550 00 = 202.575m per annum; (83000mb/202.575mbpa) = 402 years.”

The 485tcf has subsequently been reduced to 390tcf, and now by South African scientists to just 40tcf. Alarmingly, the Econometrix report of Shell SA, at the time thoroughly trumpeted around South Africa by Shell and based on a percentage of 485tcf, has not been reduced 13 times. In 2013 Treasure Karoo Action Group published a peer-reviewed analysis of the Econometrix report by Professor Martin De Witt, which concluded, inter alia, that the [Econometrix] report falls short in many areas. Nor has Professor Kantor publicly reduced his 2011 forecast of 402 years of energy for SA. And in May 2014, shale proponents were shocked by the EIA revelation that it had in one fell swoop reduced the recoverable Californian Monterey shale reserves by 96%. This shale play had previously been described by energy analysts and shale proponents like Nick Greely in the UK as “… the star of the North American show … California shale will… reinvigorate the Golden State’s economy over the next two to three years.”

Meanwhile in South Africa, President Jacob Zuma, presumably referencing the same sources as Mr. Faulkner and the infamous Shell/Econometrix report, continues to label shale gas as a game changer for South Africa, even linking it to much-needed jobs. Mr. Zuma’s view on shale gas, as with many of his Cabinet Ministers, is just as outdated as the USGS estimates of 485tcf. In my view, our president is betting on a resource using figures that have been reduced 13 times. His stoic refusal to acknowledge global resistance to shale gas mining and the uncounted costs of shale mining to the environment and the taxpayer of this country, make it seem that he wants any news as long as its good. Shale gas may well be a game-changer, but there is a winner and a loser in every game – and I wonder if our president is backing the winning team. DM